Zynga’s Q2 2021 bookings of $712M are up 37% from a year ago

Zynga beat analysts’ expectations today, reporting strong bookings and revenues in the second quarter that ended June 30 thanks to the  performance of its existing games Toon Blast, Toy Blast, Rollic’s hyper-casual portfolio, and Harry Potter: Puzzles & Spells.

And Zynga also kept up its acquisition spree by agreeing to acquire Golf Rival maker StarLark from Betta Games for $525 million. The Beijing company makes what it claims is the No. 2 golf match game with more than six million players. Zynga also closed its $250 million for Chartboost, a mobile advertising and monetization platform with 700 million monthly users; and its Rollic division topped a billion lifetime downloads.

However, Zynga noted some uncertainties related to Apple’s push toward user privacy over targeted advertising with its change to the Identifier for Advertisers (IDFA), and that made it more cautious about its forecast for the coming quarter and the full year. On top of that, and partly because of it, Zynga delayed the launch of Farmville 3 from the third quarter to the fourth quarter. And it also delayed the launch of  Star Wars: Hunters from 2021 to 2022. That game will still do a limited soft launch in Q4.

As a result of that cautious outlook, Zynga’s stock price is falling now in after-hours trading. The stock is at $8.10 a share, down 17%.

The San Francisco-based Zynga’s revenue was $720 million, up 59% year-over-year; and bookings of $712 million, up 37% year-over-year. The revenue number was its highest ever for the second quarter, and profit numbers were strong as well.

“We saw great results in the first half,” Gibeau said.

But he noted some of the mixed outlook comes from seeing some “choppiness” in the business related to new pandemic users going back to their non-game activities as well as the impact from IDFA changes, which make it harder to target the users that spend a lot of money in games.

“Starting in late May and early July, we started to see some choppiness in our business as it relates to the great reopening as well as IDFA,” Gibeau said. “Some of the later [new players] that joined Zynga in [2020 and] 2021 got to go out of the house, as COVID restrictions were easing. They started playing a little bit less.”

Gibeau noted that core players have been playing a lot, just as they were before COVID.

“But this one segment started to pull back a bit,” Gibeau said. “At the same time, Apple rolled out their IDFA [change] and the market got kind of choppy as well. We decided to pull back our user acquisition spending to see how it settled. We saw a reduction in audience from from the great reopening. We were also not aggressively acquiring new players because we didn’t think it was the right thing to do at that time. So that put a little bit of a softening on our revenue run rates for the second half. As a result, what we’ve done is we’ve taken the top line bookings number down 3%.”

The numbers still look pretty good. But Gibeau said, “We’re trying to do is be as transparent with folks as possible. Now, the good news is that we’re starting starting to see the recovery and the core business is strong. We’re seeing good early returns on user acquisition trends.”

Deal-making machine

Above: Zynga is buying StarLark and Golf Rival for $525M.

Image Credit: Zynga

While the pandemic has been a tragedy in lost lives and economic hardships, gaming is one of the few industries that appears to be emerging stronger than before the coronavirus hit. People are still playing more than before, and the San Francisco firm has also benefited from its acquisitions.

Zynga has been buying aggressively under Gibeau, and the whole game industry has been following suit. In addition to StarLark and Chartboost, Zynga has been making regular acquisitions since the 2017 purchase of casual card games from Turkey’s Peak Games for $100 million. In May 2018, Zynga bought Gram Games for $250 million, followed by the late 2018 acquisition of Empires & Puzzles maker Small Giant Games for $560 million.

The big one came in June 2020 as Zynga acquired all of Peak Games for $1.8 billion. In October 2020, Zynga bought hypercasual game maker Rollic for $168 million. It took a step into PC games with the acquisition of Echtra Games, which was started by the makers of the Torchlight series. And today it closed the acquisition of Chartboost for $200 million.

Gibeau said he was pleased with the price on StarLark, given its revenues and profits.

“Golf Rival is a casual player-vs.-player (PvP) experience. It’s kind of Words with Friends with golf clubs,” said Gibeau. “It has fantasy courses, and it’s highly social. It has just started to hit its growth curve. We really love the quality of the game. We think it’s got tremendous growth in front of us. And I think it’s the fastest growing golf game right now.”

He said that if you look at the (undisclosed) revenue and profits of Golf Rival, Zynga is getting it for a good price.

“The underlying metrics, the daily active users, the conversions to paying, are all very strong,” he said. “It’s a good business from multiple standpoints.”

Gibeau said the business is also growing organically, and so Zynga can walk away from deals if they get too expensive.

Other Q2 details

Above: Zynga has teamed up with Girls Who Code.

Image Credit: Zynga

Gibeau said in an interview with GamesBeat that the quarter benefited from live services revenue related to Rollic’s hypercasual portfolio, Words With Friends, and Zynga Poker. That was offset by lower-than-expected user pay across the portfolio. He noted that users that Zynga picked up in the second quarter of 2020 during the pandemic started playing less in Q2 of 2021 as lockdowns started to be lifted. But he noted that the core gamers continued playing as much as they ever have.

Merge Dragons and Merge Magic saw declines because they faced tougher competition in the “merge” genre, where players put different elements together to craft new items.

And Gibeau is more cautious about the second half of 2021, as he predicts annual revenue could hit $2.725 billion and bookings of $2.8 billion, less than the previously signaled target of $2.9 billion in bookings. That is due to the IDFA uncertainty, the delay in the games, and the new user uncertainties.

Building upon its successful launch in September, Harry Potter: Puzzles & Spells gained momentum as players engaged in its social gameplay. Advertising in Q2 was also a key growth contributor, hitting $133 million in revenue, up 110% from a year earlier. That was due to Rollic’s success with hypercasual games.

“Our ad business is strong, and Rollic is starting to bring in a lot of new users,” Gibeau said. “There are a lot more people in our networks playing. And we’re in a position now where we’re starting to advertise and promote things like Harry Potter, Empires & Puzzles, to get folks over. So we’ll see how it unfolds.”

Latest on IDFA

Above: Zynga’s Rollic is buying the Onnect matching game for $6 million.

Image Credit: Zynga

Apple is changing the Identifier for Advertisers (IDFA) so that people can more easily opt-out of being tracked. That’s good for user privacy. But it makes it harder to target ads at gamers who spend money, which is what game companies have had to do in the absence of great discovery on iOS devices. Without access to IDFA data, game companies will have a harder time finding users.

Gibeau said that change began to have more effect as it was implemented in iOS 14.5 in April and it became clear it was harder to target users as in the past. He expects that effect to continue in the second half of the year.

Gibeau also said the company is going to keep its profitability forecast the same. The company is not changing its guidance on adjusted EBITDA for the year, as it will focus on managing costs and focusing in on delivering profitability for our shareholders.

“As we communicated IDFA was going to be a short term headwind, as was rolled out, the industry would react and start to settle in with new tools, new techniques, new approaches, that in the long term would would start to return to normal,” Gibeau said. “I think we’re part of the way through that process. But the good news is we’re making forward progress. We’re moving our way through it.”

Zynga closed the quarter with close to 2,476 employees, and StarLark’s acquisition will add 50.

Potential market reaction

Above: Zynga is part of the #PlayApartTogether campaign to boost the WHO.

Image Credit: Zynga

The stock market reaction to Zynga’s results is usually driven by whether it hits revenue or earnings targets. But it’s complicated, because Zynga is required to report some revenue later than when it actually receives it (like when a user buys in-game currency but doesn’t use it until much later). This is called deferred revenue. But if you add the changes in deferred revenue and current revenue, you get a better picture of the actual quarter’s results in a number dubbed bookings. Zynga’s management uses this number in how it guides expectations. And its investors view bookings as more important than revenues.

As a public company, Zynga is required to report quarterly results on a U.S. GAAP basis, while analysts and investors use non-GAAP financial metrics to assess a company’s underlying performance. Bookings and adjusted earnings before income tax, depreciation, and amortization (EBITDA), excluding the impact of deferred revenue, are among those metrics that are most highly scrutinized as they reflect the actual operating activity of the company better.

Here’s the numbers that really matter when it comes to stock market trading for Zynga’s stock. Analysts expected Zynga to report earnings for the second quarter ended June 30 of 9 cents a share on revenue of $713 million. Analysts expected bookings of $715.2 million. Zynga had guided to $710 million.

And it also beat the analysts’ profit targets. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is more closely watched as a measure of the company’s profitability. After adjustments, the figure that analysts focus on (adjusted EBITDA, excluding the impact of deferred revenue) of $165.8 million, while Zynga guided to $150 million. The comparable profit target number that Zynga hit for adjusted profits was $162.2 million, well above expectations.

More Q2 details

Above: Frank Gibeau is CEO of Zynga.

Image Credit: Zynga

The company had record online game (or user pay) revenue of $587 million, up 51% year-over-year, and user pay bookings of $579 million, up 27% year-over-year.

The company had record average mobile daily active users (DAUs, or those who play at least once a day) of 41 million, up 87% year-over-year, and a best-ever average mobile monthly active users (MAUs, or those who play at least once a month) of 205 million, up 194% year-over-year.

The company reported a net income of $28 million, $58 million better than its own guidance. This was primarily driven by a net change in deferred revenue, lower contingent consideration expense (payouts for acquired companies), and than-expected stronger operating performance, partially offset by higher income taxes and other expenses. On a year-over-year basis, the net income grew by $178 million, primarily due to the higher net increase in deferred revenue, amortization of acquired intangibles, and stock-based compensation, partially offset by improved operating performance and lower contingent consideration expense.

Adjusted EBITDA was $174 million, which is $59 million above Zynga’s guidance. This was primarily driven by a stronger operating performance and lower net change in deferred revenue. On a year-over-year basis, Adjusted EBITDA increased $104 million driven by a lower net change in deferred revenue and stronger operating performance. The company closed the quarter with $1.5 billion in cash and investments, which it will use to fund future and existing acquisitions.

Live services for games such as Toon Blast, Toy Blast, and social casino games were strong in the quarter. Words With Friends delivered its best Q2 revenue and bookings quarter in the franchise’s 12-year history, driven by the recent introduction of Rewards Pass and new Solo
Challenge content.

Full-year outlook

Above: Zynga bought 80% of Rollic for $168 million.

Image Credit: Zynga

In 2021, Zynga expects to deliver revenue of $2.725 billion, up 38% from a year earlier, and bookings of $2.8 billion, compared to expectations of $2.7 billion in revenue and $2.93 billion in bookings. It expects a net increase in deferred revenue of $75 million, down $220 million, or 75%, from a year earlier.

Zynga expects to generate a net loss of $135 million, in-line with prior guidance, and now including a charge of $84 million primarily related to the impairment of its existing San Francisco lease and related leasehold improvements.

Zynga anticipates a net loss of $135 million and adjusted EBITDA of $575 million. Analysts had been expecting full-year EBITDA (excluding the impact of deferred revenue) of $669.3 million. Zynga did not change its own EBITDA number for the full year of $650 million. Zynga will manage costs and beef up the introduction of new live services in the second half, Gibeau said.

Q3 outlook

Above: Harry Potter: Puzzles & Spells is another Zynga “Forever Franchise.”

Image Credit: Zynga

For the third quarter ending September 30, Zynga expects revenue of $665 million, up 32% year-over-year, with bookings of $660 million, up 5% year-over-year. Analysts had been expecting bookings of $721 million in Q3 and they are expecting Zynga to report earnings per share of 9 cents on revenue of $721.7 million for the third quarter ending September 30.

The net loss will be $110 million, while adjusted EBITDA will be $150 million. Analysts were expecting EBITDA (excluding impact of deferred revenues) of $161.5 million, and Zynga expects it will hit $145 million in Q3.

Zynga said it will benefit from positive additions of the Rollic hypercasual games as well as a full quarter contribution from Harry Potter: Puzzles & Spells, the company anticipates this will be offset by declines in Merge Dragons and Merge Magic and older mobile and web titles. Outside of hypercasual games, Zynga is assuming it will not launch new titles in Q3.

From an ad perspective, the adoption of Apple’s privacy changes could put short-term pressure on ad revenue and bookings in Q3 compared to Q2.